Practical Advice for Managing the Deal Process

Kenneth J. Rollins

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Managing Deal Costs =

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Legal Fees are a Significant Component of Overall Costs of:

• M&A– Buying or selling a business or assets

• Bank Financing–Working capital, refinance or to fund

strategic acquisition• Capital Raising–Working capital, refinance or to fund short

or long term strategic plan

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Other Costs:

• Broker Fees• Placement Agent/Underwriter• Third Party Advisors/Consultants• Filing Fees• Printing/Mailing Costs• Taxes

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What Drives Deal Costs?

• Complexity of the structure of the transaction– e.g., cash, equity, mezzanine financing, etc.

• Complexity of the organizations involved– e.g., regulated industry, multi-tier company,

multi-state presence, etc.• Efficiency of the overall process– e.g., due diligence, negotiation of definitive

agreements, disclosures and closing matters

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Where Can You Provide Max Value to Your Organization?

• By ensuring an efficient deal process(the other two cost drivers are typically beyond your control)

• How do you ensure an efficient deal process?– Good Housekeeping– Strong Process Management

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Housekeeping

• Single most important thing you can do to save your organization time and costs

• Should be done well in advance of a transaction (Do this now!)

• In essence, it is taking inventory and conducting due diligence on your own organization to ensure that requests for information can be satisfied promptly and completely

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Benefits of Good Housekeeping

• Allows you to spot potential issues/documentation deficiencies pre-transaction, so that they can be addressed ahead of time

• Builds credibility with your counterparty• Makes you a more knowledgeable and

better advocate for your organization– Reps and warranties; disclosure schedules

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Housekeeping Checklist

• Things you should either be intimately familiar with and be able to speak intelligently about, or have at your fingertips (or be able to get your hands on quickly)– Documents listed should be in electronic

format to facilitate information sharing with counterparty

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Corporate Documents

• Corporate organization chart• Organizational documents (articles of

incorporation, bylaws, shareholders’ agreement, operating agreement, etc.)

• Minute books• Stock register and transfer books• Proxy statements• Options/other rights to acquire equity• List of current directors

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Employees

• Management organization chart• List of employees (FT/PT,

exempt/nonexempt, comp and title)• Employee and director benefit plans– Retirement plans– Deferred comp agreements– Cash and equity incentive plans–Medical/dental/vision coverages

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Employees

• Employee handbook• Vacation, sick leave and severance policy• Employment/severance agreements• Change in control agreements• Key employee life insurance

policies/plans

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Real Property and Equipment

• List of owned and leased real property• Leases (rent amount, term, renewal)• Mortgages/encumbrances• Significant/critical personal

property/equipment leases

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Financials

• Annual financial statements• Quarterly financials/earnings releases• Loan/Credit agreements• Transactions with affiliates• Tax returns• Auditor inquiry letters/attorney

responses• External and internal audit reports

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Material Contracts

• Anything material to the company in terms of duration, amount or substance

• Ask yourself: If you were buying your organization, would you want to see this contract?

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Material Contracts –Examples:

• Non-disclosure agreements• Non-routine purchase or sale

agreements (e.g., buying/selling a business/significant amount of assets)

• Material due to costs or revenues• Non-competes/non-solicits• Exclusivity arrangements

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Regulatory

• Permits and licenses• Communications with regulators• Evidence of compliance with law (where

applicable)– Policies and procedures

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Intellectual Property

• Trademarks• Patents• Licenses

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Litigation

• Plaintiff or defendant• Pending or threatened

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Insurance

• Summary of policies– Coverages and amounts

• Know where the actual policies are• Any denials of claims or pending claims

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Financial/Strategic Planning

• Current plans for additional financing• Most recent budget• Strategic plan (with projections)• Capital spending projections

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Other

• Anything that is unique to your business that you would want to know or see if you were buying your organization

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Process Management

• Know your team and the role that each person (inside and outside) should play

• Assign responsibilities/tasks• What do you want/need from outside

counsel? Communicate this up front.– Lead the process/quarterback the

transaction?– Supporting actor?

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Key Items to Take the Lead On(Save $$$)

• Due Diligence, Reps and Warranties and Disclosure Schedules– Outside counsel lacks institutional knowledge

and access to documents• Review of Reps and Warranties– Can we make these? Do we need

exceptions/carve outs?• Preparation of Disclosure Schedules– If you have done your housekeeping, you’ll be

able to prepare these in short order

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Due Diligence

• Manage the internal team in making requested information available (to both the counterparty and outside counsel) while outside counsel works on the definitive agreement(s)

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Communication

• Very important to managing deal costs• Keep outside counsel in the loop• All communications to the counterparty

reflecting changes to deal documents should occur through one lawyer per side

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Ethical Issues that Commonly Arise in the Deal Context

• Negotiations – impasses; puffery v. misstatements

• Disclosure Schedules - fraud• Conflicting Duties– Entity v. Constituents

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Pa. R.P.C. Rule 8.4 –Misconduct

• It is professional misconduct for a lawyer to:– violate or attempt to violate the Rules of

Professional Conduct, knowingly assist or induce another to do so, or do so through the acts of another; or

– engage in conduct involving dishonesty, fraud, deceit or misrepresentation.

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Impasse

• Where A Corp and B Corp have reached an impasse on a deal point, can A Corp’s lawyer advise the CEO of A Corp to contact B Corp’s CEO to attempt to resolve the impasse if A Corp’s lawyer knows that B Corp’s lawyer is unavailable to advise B Corp?

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Impasse Concern

• A Corp’s lawyer could not directly contact B Corp’s CEO to attempt to resolve the impasse. Is this a means of circumventing Pa. R.P.C. Rule 4.2 (communications with persons represented by counsel)?

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Negotiating: Puffery or Misstatements?

• Pa. R.C.P. Rule 4.1 – Truthfulness in Statements to Others:– In the course of representing a client a

lawyer shall not knowingly:• make a false statement of material fact or law to

a third person; or• fail to disclose a material fact to a third person

when disclosure is necessary to avoid aiding and abetting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.

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Puffery v. Misstatements

• Puffery – permitted– Generally, opinion exaggerating or

overemphasizing certain facts (e.g., value of the assets being purchased)

• Misstatement – not permitted– Representations and warranties –

statements of historical fact

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Disclosure Schedules

• Must we disclose this bad fact?– If it is something that you would want to

know if you were the other party, the answer is generally yes

– In addition to Rule 4.1, substantive law may require affirmative disclosure

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Organization as Client

• Pa. R.C.P. Rule 1.13 – Organization as Client– Represent the organization, but may

represent constituents subject to Rule 1.7– If lawyer knows that an officer/employee

intends to act in a manner that is a violation of law that could be imputed to the organization, the lawyer shall ”proceed as is reasonably necessary in the best interest of the organization”

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Conflicting Duties –Dual Representation

• Can a lawyer represent A Corp in negotiating a sale of A Corp to B Corp while also negotiating the employment agreement for A Corp’s CEO to become EVP of B Corp, effective immediately post-closing?–Maybe. A key concern is if the successful

negotiation of the employment agreement is a condition to the overall transaction.

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Key Takeaways

• Take Inventory– Use the checklist and get your house in

order– Convert files to electronic format

• Manage the Process– Assign roles and responsibilities– Communicate clearly

• Be Mindful of Your Ethical Obligations

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Questions?